EXHIBIT 99.1
EXCEL PARALUBES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED
DECEMBER 31, 2001
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Excel Paralubes
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of income, partners' deficit and cash flows after the
restatement described in Note 2, present fairly in all material respects, the
financial position of Excel Paralubes and its subsidiaries at December 31, 2001,
2000 and 1999, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of Excel Paralubes' management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As described in Notes 9 and 13 to the consolidated financial statements, Excel
Paralubes has significant transactions with its partners.
January 28, 2002
EXCEL PARALUBES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
2001 2000 1999
(RESTATED) (RESTATED)
ASSETS
Current assets:
Cash and cash equivalents $ 33,832 $ 1,298,958 $ 444,598
Accounts receivable - related party 62,553,801 26,825,856 54,309,277
Inventory 19,054,331 10,942,673 11,405,294
Other current assets 292,311 226,931 357,024
------------ ------------ ------------
Total current assets 81,934,275 39,294,418 66,516,193
Property, plant and equipment, net 353,638,312 367,110,151 394,701,423
Intangible assets, net 32,884,592 33,441,629 24,543,338
Other assets 9,594,909 10,478,837 11,364,350
------------ ------------ ------------
Total assets $478,052,088 $450,325,035 $497,125,304
------------ ------------ ------------
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 5,246,822 $ 6,523,466 $ 2,451,425
Accounts payable - related party 19,346,271 9,267,782 5,206,701
Current portion of long-term debt 13,348,800 3,657,600 -
Short-term notes payable 111,000,000 77,088,000 84,501,000
Interest payable 5,902,399 5,945,833 5,945,833
------------ ------------ ------------
Total current liabilities 154,844,292 102,482,681 98,104,959
Long-term debt 472,993,600 486,342,400 490,000,000
Other long-term liabilities 16,227,583 11,861,951 33,888,637
Partners' deficit (166,013,387) (150,361,997) (124,868,292)
------------ ------------ ------------
Total liabilities and partners' deficit $478,052,088 $450,325,035 $497,125,304
------------ ------------ ------------
The accompanying notes are an integral part of these
consolidated financial statements.
EXCEL PARALUBES
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
2001 2000 1999
(RESTATED) (RESTATED)
Revenues:
Net sales - related party $445,605,091 $432,153,569 $304,561,510
Processing fees - related party 10,440,453 10,440,453 9,675,680
------------ ------------ ------------
Total revenues 456,045,544 442,594,022 314,237,190
------------ ------------ ------------
Costs and expenses:
Cost of goods sold - related party 268,976,643 302,367,338 196,893,691
Operating expense 56,950,386 46,383,759 46,798,951
General and administrative expense 1,237,234 1,222,152 1,098,486
Depreciation and amortization 16,432,739 16,848,576 17,661,409
Loss on disposition of asset 2,435,591
Interest expense 40,073,725 40,768,853 38,888,051
Taxes other than income 226,207 161,458 124,320
------------ ------------ ------------
Total costs and expenses 383,896,934 410,187,727 301,464,908
------------ ------------ ------------
Net income $ 72,148,610 $ 32,406,295 $ 12,772,282
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
EXCEL PARALUBES
CONSOLIDATED STATEMENT OF PARTNERS' DEFICIT
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ATLAS
CONOCO, PROCESSING
INC. CO. TOTAL
Balance, December 31, 1998 $(51,820,287) $(51,820,287) $(103,640,574)
Distributions (17,000,000) (17,000,000) (34,000,000)
Net income for the year
ended December 31, 1999 (restated) 6,386,141 6,386,141 12,772,282
------------ ------------ -------------
Balance, December 31, 1999 (62,434,146) (62,434,146) (124,868,292)
Distributions (28,950,000) (28,950,000) (57,900,000)
Net income for the year
ended December 31, 2000 (restated) 16,203,148 16,203,147 32,406,295
------------ ------------ -------------
Balance, December 31, 2000 (75,180,998) (75,180,999) (150,361,997)
Distributions (43,900,000) (43,900,000) (87,800,000)
Net income for the year
ended December 31, 2001 36,074,305 36,074,305 72,148,610
------------ ------------ -------------
Balance, December 31, 2001 $(83,006,693) $(83,006,694) $(166,013,387)
============ ============ =============
The accompanying notes are an integral part of these
consolidated financial statements.
EXCEL PARALUBES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
2001 2000 1999
(RESTATED) (RESTATED)
Cash flows from operating activities:-
Net income $ 72,148,610 $ 32,406,295 $ 12,772,282
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 16,432,739 16,848,576 17,661,409
Loss on asset retirements 2,435,591
(Increase) decrease in accounts
receivable - related party (35,727,945) 27,483,421 (14,605,091)
(Increase) decrease in inventory (8,111,658) 462,621 770,963
(Increase) decrease in other current assets (65,380) 130,093 (272,358)
(Decrease) increase in accounts
payable and accrued liabilities (1,320,078) 4,072,041 12,043
Increase in accounts payable - related party 10,078,489 4,061,081 1,879,904
Decrease in other long-term assets 883,928 885,513
Increase (decrease) in long-term
liabilities 4,365,632 (9,818,624) 5,123,612
------------ ------------ ------------
Net cash provided by operating
activities 58,684,337 78,966,608 23,342,764
------------ ------------ ------------
Cash flows from investing activities:
Additions to property, plant
and equipment (1,578,389) (3,540,744) (3,746,435)
Additions to intangible assets (825,474) (10,280,801) (1,040,666)
Proceeds from sale of assets 1,022,297
------------ ------------ ------------
Net cash used in investing activities (2,403,863) (12,799,248) (4,787,101)
------------ ------------ ------------
Cash flows from financing activities:
Cash distributions to partners (87,800,000) (57,900,000) (34,000,000)
Repayment of long-term debt (3,657,600)
Net proceeds (payment) from issuance/
retirement of commercial paper 33,912,000 (7,413,000) 15,301,000
------------ ------------ ------------
Net cash used in financing activities (57,545,600) (65,313,000) (18,699,000)
------------ ------------ ------------
Net increase (decrease) in cash (1,265,126) 854,360 (143,337)
Cash balance at beginning of year 1,298,958 444,598 587,935
------------ ------------ ------------
Cash balance at end of year $ 33,832 $ 1,298,958 $ 444,598
============ ============ ============
Supplementary cash flow information:
Cash paid for interest $ 39,611,996 $ 40,132,046 $ 39,160,407
The accompanying notes are an integral part of these
consolidated financial statements.
EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
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1. ORGANIZATION
Excel Paralubes (Excel or the Joint Venture), a general partnership,
was formed pursuant to the laws of the state of Texas on August 2, 1994
and was created for the purpose of constructing and operating a lube
oil hydrocracker facility. Excel is a partnership which is equally
owned by Conoco Inc. (Conoco) and Atlas Processing Company (Atlas
Processing), a 100%-owned subsidiary of Pennzoil-Quaker State Company
(Pennzoil). Excel Paralubes Funding Corporation (Excel Funding), a
Delaware corporation, was formed to execute and administer the
financing arrangements of the Joint Venture and is a wholly-owned
subsidiary of Excel.
As more fully described in Notes 9 and 13, Excel and its partners have
entered into several long-term purchase and supply contracts,
administrative and processing agreements and partner guarantees.
2. RESTATEMENT
The Joint Venture and Conoco jointly own a Saturate Gas Plant (the
Plant) out of which co-products produced are allocated to the Joint
Venture and to Conoco. All of the Joint Venture's co-products produced
from the Plant are sold to Conoco. Under the Co-Products Sale and
Purchase Agreement, the volume of co-products produced is to be
allocated based on the feed stream flow rates and compositions. During
2001, the Joint Venture determined that the calculation of units owned
had been in error since the commencement of operations, as it had not
given appropriate weighting in the allocation between feed stream flow
rates and compositions relative to the flow streams processed for each
partner. Under the agreement, no adjustment is allowed for errors
occurring more than two years prior to the current period. As a result,
revenues and net income for the years ended December 31, 2000 and 1999
were previously overstated by $5.4 million and $1.8 million,
respectively. These consolidated financial statements have been
adjusted to give appropriate treatment to these amounts in their
respective periods.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ESTIMATES
The accompanying consolidated financial statements have been prepared
on the accrual basis in accordance with accounting principles generally
accepted in the United States of America which require management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
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EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
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RECLASSIFICATIONS
Certain amounts in prior periods have been reclassified to conform to
the current year's presentation.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Excel and
its wholly-owned subsidiary. All intercompany accounts and transactions
have been eliminated.
CASH AND CASH EQUIVALENTS
Cash consists of cash on deposit at financial institutions and cash
equivalents in the form of time deposits with original maturities of
three months or less.
INVENTORIES
Inventories consist principally of feedstocks. All inventories are
valued at the lower of cost or market, cost being determined by the
last-in, first-out (LIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is carried at cost and consists primarily
of refining equipment in service at year end. Property, plant and
equipment is being depreciated on a straight-line basis principally
over 28 years, the estimated life of the assets. When fixed assets are
sold or retired, cost and accumulated depreciation are eliminated from
the accounts, and gains or losses are recorded in income.
Long-lived assets are reviewed periodically for impairment whenever
events or changes in circumstances indicate the carrying amount may not
be recoverable. If the fair value is less than the carrying amount of
the asset, a loss is recognized in the accompanying consolidated
statement of operations for the difference. Fair value is generally
determined from estimated, discounted, future net cash flows.
CATALYST RECLAMATION AND TURNAROUND COSTS
Catalyst reclamation and turnaround costs are accrued as long-term
liabilities over the period between reclamations and turnarounds based
on estimates of the scope and the future costs for these activities.
Effective January 1, 2002, the Joint Venture changed its method of
accounting for costs of planned, major maintenance activities. Excel,
as of that date, will charge these costs to expense as incurred.
Excel's management believes this accounting reflects an improved
matching of costs to revenues for its refining activities. On January
1, 2002, Excel reversed its turnaround accrual amount of $16,227,582 to
income pursuant to the change in accounting.
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EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
INTANGIBLE ASSETS
Intangible assets consist of license fees and dock usage rights.
License fees are amortized on a straight-line basis over the 20 year
life of the license agreement. Dock usage rights are amortized on a
straight-line basis over the 23 year remaining life of the Joint
Venture. Intangible assets are reassessed periodically to determine
whether any potential impairment exists.
REVENUE RECOGNITION
Revenues from the sale of base oil and co-products produced are
recognized when title passes upon delivery, and are presented net of
partner rebates.
RESEARCH AND DEVELOPMENT EXPENDITURES
Research and development expenditures are recorded in operating
expenses and primarily represent pilot plant costs surrounding the
operating activities of the hydrocracker facility. For the years ended
December 31, 2001, 2000 and 1999, Excel expensed $832,891, $171,003 and
$1,371,836, respectively, for research and development expenditures.
INCOME TAXES
Excel is treated as a tax partnership under the provisions of
Subchapter K of the Internal Revenue Code. Accordingly, the
accompanying financial statements do not reflect a provision for income
taxes since Excel's results of operations and related credits and
deductions will be passed through to and taken into account by its
partners in computing their respective tax liabilities. No income taxes
have been recorded for Excel's wholly-owned subsidiary as it has had no
taxable income.
ENVIRONMENTAL LIABILITIES AND EXPENDITURES
Accruals for environmental matters are recorded in operating expenses
when it is probable that a liability has been incurred and the amount
of the liability can be reasonably estimated.
CONCENTRATION OF RISK
All of Excel's trade receivables are from Conoco and Atlas Processing.
Although collection of these receivables could be influenced by
economic factors affecting the petroleum industry, the risk of
significant loss is considered remote.
ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133), as amended
by Statement of Financial Accounting Standards No. 137 and 138 was
effective for fiscal years beginning after June 15, 2001.
SFAS 133 requires all derivatives be recognized in the balance sheet as
either assets or liabilities and measured at fair value.
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EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
Derivatives that are not hedges must be adjusted to fair value through
current earnings. If a derivative qualifies as a hedge, depending on
the nature of the hedge, changes in the fair value of the derivative,
to the extent effective, will either be offset against the change in
fair value of the hedged assets, liabilities, or future commitments
through earnings or recognized in other comprehensive income until the
hedged item is recognized in earnings. The ineffective portion of a
derivative designated as a hedge is recognized in earnings.
The Joint Venture does not utilize derivative financial instruments for
hedging or any other purposes. Upon adopting SFAS 133 the Joint Venture
evaluated its contracts and agreements in 2000 for embedded derivatives
and determined that no transition adjustment was required.
Additionally, Excel continues to review any new agreements or
significant modifications to current agreements for embedded
derivatives and as of December 31, 2001, none were identified.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" (SFAS 142). SFAS 142 changes the accounting for
goodwill and other intangible assets after an acquisition and is
effective for fiscal years beginning after December 15, 2001. The most
significant changes made by SFAS 142 are: (i) goodwill and intangible
assets with indefinite lives will no longer be amortized; (ii) goodwill
and intangible assets with indefinite lives must be tested for
impairment at least annually; and (iii) the amortization period for
intangible assets with finite lives will no longer be limited to forty
years. On January 1, 2002 the adoption of SFAS 142 had no effect on our
consolidated financial statements and we will account for all
intangible assets in accordance with the provisions of SFAS 142.
In June 2001, the FASB issued SFAS No. 143 "Asset Retirement
Obligations" (SFAS 143). SFAS 143 establishes accounting requirements
for retirement obligations associated with tangible, long-lived assets,
including (i) the timing of the liability recognition, (ii) initial
measurement of the liability, (iii) allocation of an asset's retirement
cost to expense, (iv) subsequent measurement of the liability and (v)
financial statement disclosures. SFAS 143 requires that an asset's
retirement cost should be capitalized as part of the cost of the
related long-lived asset, recorded as a liability and subsequently
allocated to expense using a systematic and rational method. We will
adopt the statement effective January 1, 2003, as required. The
transition adjustment resulting from the adoption of SFAS 143 will be
reported as a cumulative effect of a change in accounting principle. At
this time, we cannot
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EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
reasonably estimate the effect of the adoption of this statement on our
financial position, results of operations, or cash flows.
In August 2001, the FASB issued SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets" (SFAS 144) which
superseded SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144
establishes a single accounting model for long-lived assets to be
disposed of by sale and provides additional implementation guidance for
assets to be held and used and assets to be disposed of other than by
sale. The adoption of SFAS 144, effective January 1, 2002, had no
effect on our consolidated financial statements and the guidance
contained in the statement will be applied on a prospective basis.
4. INVENTORIES
At December 31, 2001, 2000 and 1999, inventory consisted of the
following:
2001 2000 1999
VGO $ 9,284,905 $ 8,137,148 $ 7,312,809
Lube stock 6,579,695 2,558,824 1,325,773
Other 373,902 1,488,313 1,390,706
LIFO reserve 2,815,829 (1,241,612) 1,376,006
------------ ------------ ------------
$19,054,331 $10,942,673 $11,405,294
============ ============ ============
The estimated excess of current cost over carrying value of inventories
valued under the LIFO method was $0, $1,241,612, and $0 at December 31,
2001, 2000, and 1999, respectively.
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EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
During 2000, inventory quantities were reduced. This reduction resulted
in a liquidation of LIFO inventory quantities carried at lower costs
prevailing in prior years as compared with the cost of 2000 purchases,
the effect of which decreased cost of goods sold and increased net
income by $169,513.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2001, 2000 and 1999 is
summarized below:
2001 2000 1999
Plant and equipment $416,773,030 $416,025,560 $416,665,463
Buildings 6,985,132 6,951,849 6,673,213
Improvements 3,139,194 3,108,420 17,241,508
Office furniture and equipment 795,321 782,849 1,710,774
Construction in progress 3,488,054 2,733,662 1,421,354
------------- ------------- -------------
431,180,731 429,602,340 443,712,312
Less - accumulated depreciation 77,542,419 62,492,189 49,010,889
------------- ------------- -------------
$353,638,312 $367,110,151 $394,701,423
============= ============= =============
Depreciation expense was $15,050,229, $15,466,066 and $15,014,760 for
the years ended December 31, 2001, 2000 and 1999, respectively.
In conjunction with Excel's scheduled turnaround activities in 2000,
the Joint Venture reevaluated the economics associated with owning the
catalyst used in its manufacturing process and decided instead to lease
the replacement catalyst (Note 10). As a result, the catalyst that had
been purchased and capitalized in conjunction with the originally
planned construction was retired resulting in a charge of $14.6 million
to earnings. Additionally, an accrual for $12.2 million for the
reclamation of the original catalyst was reversed to earnings as a
result of the decision to lease. The net loss of $2.4 million is
presented on the accompanying consolidated statement of operations.
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EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
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6. INTANGIBLE ASSETS
Intangible assets at December 31, 2001, 2000 and 1999 are summarized
below:
2001 2000 1999
Dock usage rights $12,146,941 $11,321,467 $ 1,040,666
License fees 27,650,202 27,650,202 27,650,202
Less - accumulated amortization 6,912,551 5,530,040 4,147,530
------------ ------------ ------------
$32,884,592 $33,441,629 $24,543,338
============ ============ ============
Amortization expense associated with license fees and dock usage rights
was $1,382,510, in 2001, 2000 and 1999.
7. INCOME TAXES
As of December 31, 2001, 2000 and 1999, the tax bases of the Joint
Venture's assets were greater (less) than the financial statement
carrying values as summarized below:
2001 2000 1999
Inventory $ 332,432 $ 265,267 $ 408,015
Property, plant and equipment, net (192,006,116) (170,371,915) (87,486,581)
Intangible assets, net 11,855,304 9,153,515 1,085,437
-------------- -------------- -------------
$(179,818,380) $(160,953,133) $(85,993,129)
============== ============== =============
8. DEBT
On November 5, 1996, Excel Funding issued $240 million of 7.125% senior
bonds. Interest payable on these bonds is due semiannually on May 1 and
November 1 each year. Semiannual principal payments are due in 2002
through 2011. Principal payments are due on May 1 and November 1 and
are therefore classified as current debt in the balance sheet.
On November 6, 1995, Excel Funding issued $250 million of 7.43% senior
bonds. Interest payable on these bonds is due semiannually on May 1 and
November 1 each year. The first principal payment of $19,375,000 is due
on May 1, 2011.
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EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
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Maturities of Excel's senior bonds are as follows:
YEAR ENDED
DECEMBER 31,
2002 $ 13,348,800
2003 15,691,200
2004 20,073,600
2005 21,734,400
2006 27,216,000
Thereafter 388,278,400
--------------
$ 486,342,400
==============
Recourse under the bonds is limited to the revenues and assets of
Excel. Certain restrictive covenants limit the ability of Excel to
incur additional debt, make distributions to the partners, make
investments or create liens. The most restrictive of these covenants is
the Joint Venture's requirement to maintain a debt service coverage
ratio in excess of 1.8 to 1 in any year when the Joint Venture incurs
additional senior indebtedness. As of December 31, 2001, Excel had not
incurred any additional senior debt obligations.
Excel has a variable rate $145 million line of credit with a syndicate
of banks which expires in May 2002. At December 31, 2001, 2000 and
1999, the line of credit remained unused. This credit facility is
intended for support of commercial notes. Through the credit facility,
the commercial notes can be converted to a term loan with the related
bank syndicate at the Joint Venture's discretion for a period not to
exceed one year. The weighted-average interest rate on the $111.0
million, $77.1 million and $84.5 million of commercial paper
outstanding at December 31, 2001, 2000 and 1999, was 2.5%, 7.6% and
6.5%, respectively.
Interest costs incurred in 2001, 2000 and 1999, including amortization
of debt issuance costs, totaled $40,073,725, $40,768,853 and
$38,888,051, respectively. Interest costs incurred during the period
required to bring assets to the condition and location for their
intended use are capitalized as part of acquisition costs. In 2001,
2000 and 1999, there were no interest costs capitalized.
9. RELATED PARTY TRANSACTIONS
Conoco has been designated as the operator of the partnership and, in
that capacity, provides substantially all technical and administrative
assistance and services in connection with Excel's operations. Charges
for these services were approximately
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EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
$10,275,000, $10,140,000 and $9,700,000 during 2001, 2000 and 1999,
respectively, and are included in administrative expenses and operating
costs. Included in such charges are the costs of the operators'
salaries and wages, which include related benefits such as pensions and
other postretirement benefits, allocable to Excel. Excel has no
employees.
Excel and Conoco have joint ownership of certain processing units
constructed at or adjacent to Conoco's Lake Charles Refinery. Variable
costs associated with certain of these units are allocated on the basis
of usage. Fixed costs are allocated based on the ownership percentage
of the applicable units.
As operator, Conoco is responsible for processing and paying Excel's
invoices. Disbursements made by the partner on Excel's behalf are
reimbursed semimonthly by Excel. At December 31, 2001 Excel owed Conoco
a net amount of $8,651,538. At December 31, 2000 Excel owed Conoco a
net amount of $1,611,897. At December 31, 1999 Conoco owed Excel
$1,056,692.
Excel has entered into a long-term sale and purchase agreement whereby
Conoco and Atlas Processing have agreed to purchase from Excel all base
oil production (within certain specifications) and at least the amount
taken by the other party, up to a maximum of 50% each of Excel's
expected output, at a market-based price (less an annual rebate which
is subordinate in right of payment to the senior debt of Excel). If
either Conoco or Atlas Processing fails to purchase its required amount
of Excel's output, that party is obligated to pay to Excel the amount
that Excel would have earned had the party made such purchases. Base
oil sales made to the partners, net of rebates, were $325,988,901,
$299,631,266 and $213,887,942 for 2001, 2000 and 1999, respectively.
Excel and Conoco have entered into a long-term sale and purchase
agreement which requires Conoco to purchase all co-products (within
certain specifications) produced by Excel, with the exception of
sulfur, at market-based prices as specified in the agreement.
Co-product sales made to Conoco were $119,616,190, $132,522,303
(restated) and $90,673,568 (restated) during 2001, 2000 and 1999.
Excel and Conoco have entered into a long-term feedstock sale and
purchase agreement whereby Excel agrees to purchase from Conoco all of
the required volume of vacuum gas oil (VGO) and hydrogen needed by the
hydrocracker facility. These feedstocks must meet certain quality
specifications and are purchased at a market-based price as specified
in the agreement. Feedstocks purchased by Excel under the agreement
were $261,685,781, $294,000,163 and $196,122,727 during 2001, 2000 and
1999, respectively. At certain times, the Joint Venture may purchase
additional
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EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
feedstock from third parties when Conoco's volumes do not meet periodic
requirements for the hydrocracker facility.
Excel and Conoco have entered into long-term processing agreements
which require Conoco to pay processing fees for the use of the vacuum
unit and hydrogen supply facilities. The fee for the vacuum unit is
equal to $1.50 for each barrel of VGO produced from the unit, not to
exceed $6,740,000 in any one year. Fees for the hydrogen supply
facilities are $23,000 per day for each day the facilities are
utilized, not to exceed $4,202,000 in any one year. Processing fees
received for these facilities were $10,440,453, $10,440,453 and
$9,675,680 during 2001, 2000 and 1999, respectively.
In accordance with a long-term agreement between Excel and Conoco,
Excel pays Conoco a fixed monthly fee of $73,875 for use of Conoco's
wastewater facility. This fee will continue through December 31, 2024
and amounted to $886,500 in 2001, 2000 and 1999, respectively. The fee
is included in the accompanying consolidated statement of operations.
Excel has entered into an agreement with Conoco to share the costs of
an improvement project performed by Conoco on a dock located in Lake
Charles, Louisiana. Excel utilizes this dock for the delivery of its
base oil finished product. Pursuant to the agreement, Excel paid 83% of
the costs of the improvement project and capitalizes these costs as an
intangible asset. As of December 31, 2001, 2000 and 1999, Excel had
capitalized $12.1 million, $11.3 million and $1.0 million,
respectively, related to this project.
10. OPERATING LEASES
In February 2001, Excel entered into an operating lease agreement with
ExxonMobil Corporation (ExxonMobil) to lease a performance catalyst.
The operating lease requires a minimum two year commitment with annual
options for renewal thereafter. The Joint Venture expects to extend the
lease to four years to coincide with expected turnaround activities.
The catalyst must be returned to ExxonMobil at the end of the lease
term.
Excel leases the project site land from Conoco. The lease expires on
December 31, 2024; at which time, the lease will automatically be
extended for successive renewal terms of five years each unless either
the lessee or lessor elects to terminate the lease.
- 10 -
EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
The following details the future lease payments required of Excel for
the five succeeding years and thereafter:
2002 $ 7,571,834
2003 5,926,883
2004 5,186,655
2005 2,903,219
2006 2,462,981
Thereafter 44,333,661
------------
$68,385,233
============
Rental expense under operating leases was $6,461,492 and $2,796,190 and
$2,481,600 for 2001, 2000 and 1999.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 2001, 2000 and 1999, Excel had outstanding long-term
debt with a carrying value of $486 million. Based on borrowing rates
available at the respective balance sheet dates, the fair value of this
debt was approximately $508 million, $443 million and $450 million as
of December 31, 2001, 2000 and 1999, respectively. The reported amounts
of financial instruments such as cash equivalents, accounts receivable
and short-term notes payable approximate fair value because of their
short maturities.
12. COMMITMENTS AND CONTINGENCIES
Excel does not maintain general liability (including sudden and
accidental pollution) insurance coverage. In the event of a major
disruption of Excel's operations, the Partners will evaluate at that
time whether to refurbish Excel's operations to normal levels.
On July 31, 1995, a Petition for Class Action was filed in the 14th
Judicial District Court, Parish of Calcasieu, State of Louisiana,
against Conoco and a contractor that excavated soil from the project
site, by persons upon whose property such soil was placed, alleging
that the soil contained harmful and dangerous materials, including
asbestos and/or lead. The plaintiffs seek unspecified damages,
including punitive or exemplary, compensatory and clean-up damages and
attorneys' fees. Conoco intends to vigorously defend the litigation.
Conoco has voluntarily removed and replaced contaminated soils from
affected properties. Based on the agreements that Excel has with
Conoco, Excel is potentially obligated to Conoco for approximately 83%
of any amounts paid by Conoco in connection with this litigation and
related remediation. As such, Excel agreed to reimburse Conoco for a
portion of the costs. Excel's portion was $174,600, $73,920 and $70,456
in 2001, 2000 and 1999, respectively. Excel
- 11 -
EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
believes that the possibility of a material amount of the litigation or
future remediation expenses, may result from this case, and could have
a material, adverse effect on Excel's financial condition or results of
operations; however, an estimated amount is not currently determinable.
13. GUARANTEES
Conoco and Atlas Processing have entered into a Partner Loan Agreement
with Excel and the First National Bank of Chicago, as agent on behalf
of holders of certain debt of Excel, pursuant to which Conoco and Atlas
Processing agreed to provide liquidity support to Excel up to an
aggregate amount of $60 million outstanding at any time during the
existence of a liquidity cash flow deficit.
Pennzoil has guaranteed all of Atlas Processing's obligations and E. I.
duPont de Nemours and Company (DuPont) has guaranteed all of Conoco's
obligations under all Excel offtake and operating agreements as
described in Note 9.
In August 2000, DuPont completed the final step in its planned
divestiture of its ownership interest in Conoco. As a result of
DuPont's previous ownership interest in Conoco, the DuPont guarantee of
Conoco's obligations to Excel may be terminated if (i) the ratings of
the Excel senior bonds, after giving effect to the guaranteed
termination, are affirmed to be at least the lower of (a) A3 and A- or
(b) the ratings in effect just prior to the termination of the
guarantee; (ii) all of Excel's senior bonds are paid in full or (iii)
66-2/3% of the senior debt holders agree to a change in the terms of
the guarantee. As of December 31, 2001, the DuPont guarantee of
Conoco's obligations to Excel as described in Note 9 remained in place.
- 12 -
Balance Sheet
2001 2000 1999
(RESTATED) (RESTATED)
ASSETS
Current assets:
Cash and cash equivalents $ 33,832 $ 1,298,958 $ 444,598
Accounts receivable - related party 62,553,801 26,825,856 54,309,277
Inventory 19,054,331 10,942,673 11,405,294
Other current assets 292,311 226,931 357,024
------------- ------------- -------------
Total current assets 81,934,275 39,294,418 66,516,193
Property, plant and equipment, net 353,638,312 367,110,151 394,701,423
Intangible assets, net 32,884,592 33,441,629 24,543,338
Other assets 9,594,909 10,478,837 11,364,350
------------- ------------- -------------
Total assets $478,052,088 $450,325,035 $497,125,304
============= ============= =============
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 5,246,822 $ 6,523,466 $ 2,451,425
Accounts payable - related party 19,346,271 9,267,782 5,206,701
Current portion of long-term debt 13,348,800 3,657,600 -
Short-term notes payable 111,000,000 77,088,000 84,501,000
Interest payable 5,902,399 5,945,833 5,945,833
------------- ------------- -------------
Total current liabilities 154,844,292 102,482,681 98,104,959
Long-term debt 472,993,600 486,342,400 490,000,000
Other long-term liabilities 16,227,583 11,861,951 33,888,637
Partners' deficit (166,013,387) (150,361,997) (124,868,292)
------------- ------------- -------------
Total liabilities and partners' deficit $478,052,088 $450,325,035 $497,125,304
============= ============= =============
Page 1
Operations
2001 2000 1999
(RESTATED) (RESTATED)
Revenues:
Net sales - related party $445,605,091 $432,153,569 $304,561,510
Processing fees - related party 10,440,453 10,440,453 9,675,680
------------- ------------- -------------
Total revenues 456,045,544 442,594,022 314,237,190
------------- ------------- -------------
Costs and expenses:
Cost of goods sold - related party 268,976,643 302,367,338 196,893,691
Operating expense 56,950,386 46,383,759 46,798,951
General and administrative expense 1,237,234 1,222,152 1,098,486
Depreciation and amortization 16,432,739 16,848,576 17,661,409
Loss on disposition of asset 2,435,591
Interest expense 40,073,725 40,768,853 38,888,051
Taxes other than income 226,207 161,458 124,320
------------- ------------- -------------
Total costs and expenses 383,896,934 410,187,727 301,464,908
------------- ------------- -------------
Net income $ 72,148,610 $ 32,406,295 $ 12,772,282
============= ============= =============
Page 2
Partners Deficit
ATLAS
CONOCO, PROCESSING
INC. CO. TOTAL
Balance, December 31, 1998 $(51,820,287) $(51,820,287) $(103,640,574)
Distributions (17,000,000) (17,000,000) (34,000,000)
Net income for the year
ended December 31, 1999 (restated) 6,386,141 6,386,141 12,772,282
------------- ------------- --------------
Balance, December 31, 1999 (62,434,146) (62,434,146) (124,868,292)
Distributions (28,950,000) (28,950,000) (57,900,000)
Net income for the year
ended December 31, 2000 (restated) 16,203,148 16,203,147 32,406,295
------------- ------------- --------------
Balance, December 31, 2000 (75,180,998) (75,180,999) (150,361,997)
Distributions (43,900,000) (43,900,000) (87,800,000)
Net income for the year
ended December 31, 2001 36,074,305 36,074,305 72,148,610
------------- ------------- --------------
Balance, December 31, 2001 $(83,006,693) $(83,006,694) $(166,013,387)
============= ============= ==============
Page 3
Cash Flows
2001 2000 1999
(RESTATED) (RESTATED)
Cash flows from operating activities:-
Net income $72,148,610 $32,406,295 $12,772,282
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 16,432,739 16,848,576 17,661,409
Loss on asset retirements 2,435,591
(Increase) decrease in accounts
receivable - related party (35,727,945) 27,483,421 (14,605,091)
(Increase) decrease in inventory (8,111,658) 462,621 770,963
(Increase) decrease in other current assets (65,380) 130,093 (272,358)
(Decrease) increase in accounts
payable and accrued liabilities (1,320,078) 4,072,041 12,043
Increase in accounts payable - related party 10,078,489 4,061,081 1,879,904
Decrease in other long-term assets 883,928 885,513
Increase (decrease) in long-term
liabilities 4,365,632 (9,818,624) 5,123,612
------------ ------------ ------------
Net cash provided by operating
activities 58,684,337 78,966,608 23,342,764
------------ ------------ ------------
Cash flows from investing activities:
Additions to property, plant
and equipment (1,578,389) (3,540,744) (3,746,435)
Additions to intangible assets (825,474) (10,280,801) (1,040,666)
Proceeds from sale of assets 1,022,297
------------ ------------ ------------
Net cash used in investing activities (2,403,863) (12,799,248) (4,787,101)
------------ ------------ ------------
Cash flows from financing activities:
Cash distributions to partners (87,800,000) (57,900,000) (34,000,000)
Repayment of long-term debt (3,657,600)
Net proceeds (payment) from issuance/
retirement of commercial paper 33,912,000 (7,413,000) 15,301,000
------------ ------------ ------------
Net cash used in financing activities (57,545,600) (65,313,000) (18,699,000)
------------ ------------ ------------
Net increase (decrease) in cash (1,265,126) 854,360 (143,337)
Cash balance at beginning of year 1,298,958 444,598 587,935
------------ ------------ ------------
Cash balance at end of year $ 33,832 $ 1,298,958 $ 444,598
============ ============ ============
Supplementary cash flow information:
Cash paid for interest $39,611,996 $40,132,046 $39,160,407
Page 4
Inventories
2001 2000 1999
VGO $ 9,284,905 $ 8,137,148 $ 7,312,809
Lube stock 6,579,695 2,558,824 1,325,773
Other 373,902 1,488,313 1,390,706
LIFO reserve 2,815,829 (1,241,612) 1,376,006
------------ ------------ ------------
$19,054,331 $10,942,673 $11,405,294
============ ============ ============
Page 5
PP&E
2001 2000 1999
Plant and equipment $416,773,030 $416,025,560 $416,665,463
Buildings 6,985,132 6,951,849 6,673,213
Improvements 3,139,194 3,108,420 17,241,508
Office furniture and equipment 795,321 782,849 1,710,774
Construction in progress 3,488,054 2,733,662 1,421,354
------------- ------------- -------------
431,180,731 429,602,340 443,712,312
Less - accumulated depreciation 77,542,419 62,492,189 49,010,889
------------- ------------- -------------
$353,638,312 $367,110,151 $394,701,423
============= ============= =============
Page 6
Intang Assets & Def Charges
2001 2000 1999
Dock usage rights $12,146,941 $11,321,467 $ 1,040,666
License fees 27,650,202 27,650,202 27,650,202
Less - accumulated amortization 6,912,551 5,530,040 4,147,530
------------ ------------ ------------
$32,884,592 $33,441,629 $24,543,338
------------ ------------ ------------
Page 7
Income Taxes
2001 2000 1999
Inventory $ 332,432 $ 265,267 $ 408,015
Property, plant and equipment, net (192,006,116) (170,371,915) (87,486,581)
Intangible assets, net 11,855,304 9,153,515 1,085,437
-------------- -------------- -------------
$(179,818,380) $(160,953,133) $(85,993,129)
============== ============== =============
Page 8
Senior Bonds
YEAR ENDED
DECEMBER 31,
2002 $ 13,348,800
2003 15,691,200
2004 20,073,600
2005 21,734,400
2006 27,216,000
Thereafter 388,278,400
--------------
$ 486,342,400
=============
Page 9
Future Lease Payments
2002 $ 7,571,834
2003 5,926,883
2004 5,186,655
2005 2,903,219
2006 2,462,981
Thereafter 44,333,661
-------------
$ 68,385,233
=============
Page 10